SCOTTSDALE CAPITAL ADVISORS CORPORATION and ALPINE SECURITIES CORPORATION v. FINANCIAL INDUSTRY REGULATORY AUTHORITY, INC.
Civil Action No. 23-1506 (BAH)
UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA
June 7, 2023
UNITED STATES OF AMERICA, Intervenor Defendant.
MEMORANDUM OPINION
Plaintiffs Scottsdale Capital Advisors Corporation (“SCA“) and Alpine Securities Corporation (“Alpine“) originally filed suit in the Middle District of Florida asserting several constitutional challenges to the operation and structure of the Financial Industry Regulatory Authority, Inc. (“FINRA“), a private corporation responsible for regulating broker-dealers in the securities industry. As litigation proceeded in that case, FINRA expedited an enforcement action against Alpine, alleging that this company committed thousands of violations of a permanent FINRA order to cease-and-desist certain conduct, which conduct required Alpine‘s immediate expulsion from FINRA‘s membership and thus the securities industry. Alpine coins that punishment “the corporate death penalty” given that such expulsion would necessitate a complete closure of Alpine‘s business and operations. Pls.’ Second Am. Compl. (“SAC“) ¶¶ 10, 129, ECF No. 43.
Weeks before the expedited enforcement action‘s scheduled hearing before FINRA, Alpine sought an emergency preliminary injunction from the district court in the Middle District of Florida, seeking to halt the expedited enforcement proceeding pending resolution of Alpine‘s constitutional challenges. After briefing and oral argument on the motion, however, the case was transferred to this Court for resolution—only two business days before the FINRA hearing. The day before the scheduled hearing, Alpine then renewed its emergency motion seeking a preliminary injunction or temporary restraining order (“TRO“). Alpine also seeks reconsideration of an earlier order of this Court denying its original emergency motion as filed in the Middle District of Florida.
Upon consideration of Alpine‘s two pending motions, extensive briefing, oral argument, and the entire record herein, Alpine‘s motion for reconsideration is granted and its emergency motion for a preliminary injunction or TRO is denied.
I. BACKGROUND
The factual background and procedural history of this case is briefly recounted below.
A. Legal Landscape
The Securities Exchange Act of 1934 (“the Exchange Act“), as amended in 1938, created a complex statutory regime “of cooperative self-regulation” of so-called over-the-counter securities markets. See United States v. NASD, 422 U.S. 694, 700 n.6 (1975). That scheme permits private entities, known as self-regulatory organizations (“SROs“), to perform a supervisory role over the securities industry, subject to oversight from the Securities and Exchange Commission (“SEC” or “the Commission“).
1. FINRA‘s Corporate Structure
FINRA is a Delaware not-for-profit corporation and SEC-registered national securities association that conducts business in the District of Columbia. See SAC ¶¶ 30-31. Following its formation from a 2007 consolidation between its predecessor, the National Association of Securities Dealers (“NASD“), and the enforcement arm of the New York Stock Exchange (“NYSE“), id. ¶ 40; see also Order Approving Proposed Rule Change to Amend the By-Laws of NASD, 72 Fed. Reg. 42,169 (Aug. 1, 2007), FINRA is governed by a board of twenty-two members, comprised of industry and non-industry members and FINRA‘s chief executive officer (“CEO“), which board oversees the organization‘s management and administration, see SAC ¶¶ 42-43. Board members are selected by FINRA‘s members and are removable only by a majority vote of FINRA‘s board or, “in very limited and specific circumstances, the SEC,” and thus no Board member or the CEO is appointed by the SEC, the U.S. President, Congress, or any other governmental body. Id. ¶¶ 57-58; see also 72 Fed. Reg. at 42,170-72.1 At the next level of management, FINRA executives are appointed and removed by the board, see SAC ¶ 59, with no involvement by the SEC or any other government official or body. FINRA‘s funding is derived “almost exclusively” through membership fees as well as fines, penalties, and sanctions, id. ¶ 52, with its budget set “without any constraint or legislative cap” because FINRA receives no government funding, id. ¶ 51. See also FINRA By-Laws art. VI § 1 (Power of the Corporation to Fix and Levy Assessments), https://www.finra.org/rules-guidance/rulebooks/corporate-organization/power-corporation-fix-and-levy-assessments [https://perma.cc/PB84-KUXL]. Part of that budget includes salaries for FINRA‘s executives, as determined by the organization itself. See id. ¶ 53.
2. FINRA‘s Rules
FINRA‘s supervisory duties over its membership—including roughly 3,400 brokerage firms, 150,000 branch offices, and 610,000 individual registered securities representatives—is varied. See id. ¶ 41. While FINRA promulgates its own rules and standards and enforces compliance with those rules through administering sanctions and barring individuals from FINRA membership, see id. ¶ 50, this supervisory authority is subject to the SEC‘s oversight and control, Turbeville v. FINRA, 874 F.3d 1268, 1270 (11th Cir. 2017). For instance, the SEC may limit FINRA‘s operations or registration if FINRA violates a statute or SEC regulation. See
3. FINRA‘s Enforcement Regime
Enforcement proceedings result from FINRA‘s investigation into alleged misconduct by its members, and such investigations are done at FINRA‘s discretion, without any influence from the SEC or other branch of government. See SAC ¶ 55; see also
An aggrieved party may appeal that decision to FINRA‘s National Adjudicatory Council (“NAC“), which “may affirm, dismiss, modify, or reverse with respect to each finding.” FINRA Rule 9348 (Nov. 2,
Final decisions by the SEC are subject to review by a federal appellate court with the filing of a petition by an aggrieved party, see
B. FINRA‘s Enforcement Action Against Plaintiff
Plaintiffs are broker-dealers and registered FINRA members, both owned by the same parent holding company. See SAC ¶¶ 28-29; Transcript of Hearing (June 1, 2023) (“Hr‘g Tr.“) at 9:17-23.3 As early as 2019, FINRA received complaints from customers of Alpine alleging that the firm charged a significant monthly account fee. See FINRA‘s Opp‘n to Pl.‘s Renewed Mot. for Preliminary Injunction and Temporary Restraining Order (“FINRA‘s TRO Opp‘n“), Ex. A, March 22, 2022 Extended Hearing Panel Decision, Dep‘t of Enf‘t v. Alpine Sec. Corp., FINRA Disciplinary Proceeding No. 2019061232601 (“March 2022 Panel Decision“) at 2, ECF No. 70-1. On March 22, 2022, a FINRA hearing panel found that Alpine “converted and misused customer funds and securities, engaged in unauthorized trading, charged and paid customers unfair prices in securities transactions, charged customers unreasonable and discriminatory fees, and made an unauthorized capital withdrawal.” March 2022 Panel Decision at 1. For Alpine‘s violations, the panel ordered Alpine‘s expulsion from FINRA‘s membership, payment of restitution in an amount exceeding $4 million, and a “permanent cease and desist order.” Id. Alpine then appealed that panel decision to the NAC, which appeal had the effect of staying the expulsion and restitution sanctions but the “permanent cease and desist order” took immediate effect, in accordance with the explicit use of this term in the panel decision and governing FINRA rules. See FINRA‘s TRO Opp‘n at 3-4; see also FINRA Rule 9311(b) (“Any such appeal, however, will not stay a decision, or that part
During the pendency of the NAC appeal, FINRA discovered that Alpine failed to comply with the permanent cease-and-desist order that had not been stayed pending Alpine‘s appeal to the NAC. See FINRA‘s TRO Opp‘n at 4. After a months’ long investigation, FINRA determined that Alpine violated the cease-and-desist order “more than 35,000 times by charging customers millions of dollars in unreasonable, unfair, and unlawful fees and commissions.” Id. Notably, Alpine does not contest that position, but rather counters that its actions were not improper. See SAC ¶ 127. As a result, on April 19, 2023, FINRA initiated an expedited enforcement proceeding (“Enforcement Proceeding“) to expel Alpine from FINRA membership and stop its continued improper conduct, a punishment characterized by plaintiffs as “the corporate death penalty.” See FINRA‘s TRO Opp‘n at 4; SAC ¶¶ 126-129. The Enforcement Proceeding was scheduled for May 31, 2023. See Alpine‘s Renewed Emergency Mot. for a Preliminary Injunction & Temporary Restraining Order (“Pl.‘s TRO Mot.“) at 2, ECF No. 66. At a hearing before this Court, held on June 1, 2023, Alpine disclosed that the FINRA hearing officer postponed the Enforcement Proceeding until June 5, 2023, pending resolution of Alpine‘s motion for equitable relief, described below. See Hr‘g Tr. at 7:13-16.
C. Procedural History in Federal Court
Plaintiffs filed their initial complaint in the Middle District of Florida on October 12, 2022, see Compl., ECF No. 1, then amended that complaint on February 3, 2023, see First Am. Compl., ECF No. 27. The government intervened on February 6, 2023, see Notice of Intervention by the United States of America, ECF No. 28, shortly before FINRA moved to dismiss the first amended complaint on March 10, 2023, with the government‘s support, see FINRA‘s Mot. Dismiss Pls.’ Am. Compl., ECF No. 35; Gov‘t‘s Mem. of Law in Defense of the Challenged Provisions of the Federal Securities Law, ECF No. 37. Before FINRA‘s dismissal motion was fully briefed, the Supreme Court issued Axon Enterprise Inc. v. FTC, 143 S. Ct. 890 (2023), which plaintiffs now claim is relevant to the relief they seek in their complaint.
Five days after Axon‘s issuance, FINRA initiated the Enforcement Proceeding against Alpine on April 19, 2023. See SAC ¶ 126. Plaintiffs quickly filed the operative second amended complaint on April 28, 2023, in response to Axon, see SAC, and then approximately a week later, Alpine filed an emergency motion for a preliminary injunction on May 9, 2023, seeking to halt the Enforcement Proceeding then scheduled for May 31, 2023, see Pl.‘s Emergency Mot. for Preliminary Injunction, ECF No. 45. The assigned Judge in the Middle District of Florida held a three-hour hearing on the motion on May 22, 2023, see Min. Entry (May 22, 2023), and, two days later, ordered the transfer of this case to this Court, see Order, ECF No. 62. That transfer took effect at approximately noon on Friday, May 26, 2023—two business days before the scheduled Enforcement Proceeding. See Case Transfer, ECF No. 63.
Upon being assigned this case, this Court denied, without prejudice, Alpine‘s emergency motion for preliminary injunction and FINRA‘s motion to dismiss because the materials filed relied on out-of-circuit, nonbinding case law mostly from the Fifth and Eleventh Circuits that was unfit for consideration of such extraordinary equitable relief on a truncated timeline.
At the hearing, the parties were directed to submit any supplemental briefs regarding the consequences should FINRA be deemed a state actor, as plaintiffs urged, and the validity of plaintiffs’ First Amendment claim. See Min. Order (June 1, 2023). Following submission of those memoranda, see Gov‘t‘s Supp. Br. in Resp. to the Court‘s June 1, 2023 Min. Order (“Gov‘t‘s Supp. Br.“), ECF No. 82; FINRA‘s Supp. Br. in Opp‘n to Pl.‘s Renewed Emergency Mot. for Preliminary Injunction and Temporary Restraining Order (“FINRA‘s Supp. Br.“), ECF No. 83; Pl.‘s Supp. Br. in Supp. of Renewed Emergency Mot. for Preliminary Injunction and Temporary Restraining Order (“Pl.‘s Supp. Br.“), ECF No. 84; Pl.‘s Supp. Resp. Br. in Supp. of Renewed Emergency Mot. for Preliminary Injunction and Temporary Restraining Order (“Pl.‘s Supp. Reply“), ECF No. 85; FINRA‘s Resp. to Supp. Br. of Alpine (“FINRA‘s Supp. Reply“), ECF No. 86, plaintiff‘s motions are now ripe for consideration.
II. LEGAL STANDARD
A temporary restraining order (“TRO“) “is an extraordinary remedy that should be granted only when the party seeking the relief, by a clear showing, carries the burden of persuasion.” Cobell v. Norton, 391 F.3d 251, 258 (D.C. Cir. 2004). An application for a TRO is analyzed using the same factors applicable to a request for preliminary injunctive relief. See, e.g., Gordon v. Holder, 632 F.3d 722, 723-24 (D.C. Cir. 2011) (applying the preliminary injunction standard to a district court decision denying a motion for TRO and preliminary injunction). Preliminary injunctive relief is similarly “an extraordinary remedy that may only be awarded upon a clear showing that the plaintiff is entitled to such relief.” Sherley v. Sebelius, 644 F.3d 388, 392 (D.C. Cir. 2011) (quoting Winter v. Nat. Res. Def. Council, Inc., 555 U.S. 7, 22 (2008)); see also Mazurek v. Armstrong, 520 U.S. 968, 972 (1997) (per curiam) (“[A] preliminary injunction is an extraordinary and drastic remedy, one that should not be granted
A plaintiff seeking preliminary injunctive relief must establish the following four factors: “that he is likely to succeed on the merits, that he is likely to suffer irreparable harm in the absence of preliminary relief, that the balance of equities tips in his favor, and that an injunction is in the public interest.” Ramirez v. Collier, 142 S. Ct. 1264, 1275 (2022) (quoting Winter, 555 U.S. at 20); see also Archdiocese of Wash. v. Wash. Metro. Area Transit Auth., 897 F.3d 314, 321 (D.C. Cir. 2018); Aamer v. Obama, 742 F.3d 1023, 1038 (D.C. Cir. 2014). The balance of equities and the public interest factors “merge” when the government is the opposing party. Karem v. Trump, 960 F.3d 656, 668 (D.C. Cir. 2020). When seeking such relief, “the movant has the burden to show that all four factors, taken together, weigh in favor of the injunction.” Abdullah v. Obama, 753 F.3d 193, 197 (D.C. Cir. 2014) (quoting Davis v. Pension Benefit Guar. Corp., 571 F.3d 1288, 1292 (D.C. Cir. 2009)) (internal quotation marks omitted).5
Preliminary injunctive relief and TROs are not remedies “awarded as of right,” but “[a]s a matter of equitable discretion, a preliminary injunction does not [even] follow as a matter of course from a plaintiff‘s showing of a likelihood of success on the merits.” Benisek v. Lamone, 138 S. Ct. 1942, 1943-44 (2018). Rather, a court must be persuaded as to all four factors. Moreover, “a party requesting a preliminary injunction must generally show reasonable diligence.” Id. at 1944.
III. DISCUSSION
While the focus of the pending motion for injunctive relief is to stall the pending Enforcement Proceeding against Alpine, plaintiffs’ complaint is far more sweeping to challenge the “unconstitutional operation and structure of FINRA.” SAC ¶ 1; accord id. at 33. Specifically, plaintiffs lodge six claims against FINRA: (1) that “FINRA‘s wide-ranging exercise of executive power is immune from Presidential supervision or control[,]” namely that FINRA‘s board “are afforded multi-level protection from removal thus impeding the President‘s ability to oversee the officers executing the laws of the United States in violation of the Constitution‘s separations of powers[,]” id. ¶¶ 141-151 (Count I); (2) that FINRA‘s board members are “officers of the United States whose appointments must comply with the Appointments Clause of the United States Constitution” and presently do not, id. ¶¶ 152-157 (Count II); (3) that the Exchange Act “improperly and unconstitutionally delegates
Upon review of multiple papers filed by all parties and consideration of the arguments presented at the June 1, 2023, hearing before this Court, plaintiff‘s motion for reconsideration is granted. As refiled, plaintiff‘s motion for preliminary injunction and TRO properly cites binding law of this Circuit and correctly queues the issues for this Court‘s consideration.
Alpine has, however, failed to show a likelihood of success on the merits of plaintiffs’ claims because FINRA is likely not a state actor, obviating all but one of plaintiffs’ constitutional claims, and their surviving First Amendment claim likely lacks merit. Plaintiffs also likely do not assert a viable nondelegation doctrine claim. In reality, plaintiffs offer a multitude of critiques of FINRA throughout their complaint as disgruntled members of FINRA; however, those criticisms fall far short of amounting to likely sustainable constitutional challenges to the structure and processes of FINRA.
While, if expelled from FINRA, Alpine is sure to suffer from the forced closure of its business, such irreparable harm was of Alpine‘s own making by apparently viewing the permanent cease-and-desist order issued as part of the March 2022 Panel Decision as stayed pending appeal. See SAC ¶¶ 8-10 (acknowledging that the Enforcement Proceeding is “based on Alpine‘s alleged failure to comply with an order contained in an Initial Hearing Panel Decision that was issued in a prior lengthy FINRA action,” but arguing “[h]owever, [such] Decision does not become final or effective unless and until it is affirmed by FINRA‘s appellate tribunal, the [NAC]. And that has not occurred ... and no [NAC] decision has issued“). Ignoring the immediate effectiveness of a permanent cease-and-desist order, due to operation of an explicit FINRA rule, see March 2022 Panel Decision (using term “permanent cease and desist order“); FINRA Rule 9311(b), is notable context in assessing the irreparable harm claimed by Alpine. Further, given Alpine‘s unlikelihood of success in urging novel constitutional attacks on FINRA‘s structure and operations, reliance on the “here-and-now injury” of being subject to the Enforcement Proceeding, as defined by Axon, simply is insufficient to justify the extraordinary equitable relief requested. This conclusion is confirmed in assessing the balance of equities, which falls heavily in defendants’ favor because the harm of permitting Alpine to continue its allegedly knowing violation of FINRA rules to the detriment of its customers, the securities industry, and the public must be given great weight.
Having failed on all factors for injunctive relief, as detailed below, Alpine‘s motion is denied.
A. Likelihood of Success on the Merits
Plaintiffs’ separation of powers, Appointments Clause, Fifth Amendment, and Seventh Amendment claims are unlikely to succeed because FINRA is most likely not
1. FINRA Is Not a State Actor
“As a matter of substantive constitutional law the state-action requirement reflects judicial recognition of the fact that ‘most rights secured by the Constitution are protected only against infringement by governments.‘” Lugar v. Edmonson Oil Co., Inc., 457 U.S. 922, 936 (1982) (quoting Flagg Bros. Inc. v. Brooks, 436 U.S. 149, 156 (1978)). That said, the Supreme Court has held, “many times, that actions of private entities can sometimes be regarded as governmental action for constitutional purposes.” Lebron v. Nat‘l R.R. Passenger Corp., 513 U.S. 374, 378 (1995) (collecting cases).
Whether an entity is a state actor is largely a “fact-bound inquiry.” Lugar, 457 U.S. at 939. While the Supreme Court “has articulated a number of different factors or tests in different contexts” to determine state action, id., some key considerations remain consistent. Cf. Brentwood Acad. v. Tenn. Secondary Sch. Athletic Ass‘n, 531 U.S. 288, 295 (2001) (“From the range of circumstances that could point toward the State behind an individual face, no one fact can function as a necessary condition across the board for finding state action; nor is any set of circumstances absolutely sufficient[.]“). A court must consider if “there is such a close nexus between the State and the challenged action that seemingly private behavior may be fairly treated as that of the State itself.” NB ex rel. Peacock v. District of Columbia, 794 F.3d 31, 43 (D.C. Cir. 2015) (quoting Brentwood, 531 U.S. at 295); accord Jackson v. Metro. Edison Co., 419 U.S. 345, 351 (1974) (“[T]he inquiry must be whether there is a sufficiently close nexus between the State and the challenged action of the regulated entity so that the action of the latter may be fairly treated as that of the State itself.“).
Determining a sufficient nexus involves assessing, among other things, the government‘s “exercise of ‘coercive power,‘” Brentwood, 531 U.S. at 296 (quoting Blum v. Yaretsky, 457 U.S. 991, 1004 (1982)), which has been described variously as the government‘s provision of “significant encouragement, either overt or covert,” id. (quoting Blum, 457 U.S. at 1004), and the degree of government control over the entity, id. (citing Pennsylvania v. Bd. of Dirs. of City Trusts of Phila., 353 U.S. 230, 231 (1957)), as well as the private entity‘s “willful” participation in a joint activity with the government, id. (quoting Lugar, 457 U.S. at 941), including the extent to which a public function is delegated to a private entity, id., and how “entwined with governmental policies” the private entity is or the degree to which the government is “entwined in [the private entity‘s] management or control,” id. (quoting Evans v. Newton, 382 U.S. 296, 299, 301 (1966)). An earlier Supreme Court decision also relied on two considerations for state action: (1) whether the private entity acted pursuant to “some right or privilege created by the State or by a rule of conduct imposed by the state or by a person
Employing all these considerations to the facts at hand, plaintiff has not proven the likelihood that FINRA is a state actor. First, the facts of FINRA‘s creation, operation, and oversight structure do not indicate state actor status. FINRA is a private organization incorporated under the laws of Delaware; neither an act of Congress nor the SEC created FINRA. Cf. Blount v. SEC, 61 F.3d 938, 941 (D.C. Cir. 1995) (holding that the Municipal Securities Rulemaking Board was a state actor because, inter alia, it was “created by an act of Congress“); Lugar, 457 U.S. 941-42 (holding that respondents acted “under color of state law” in depriving petitioner of his property pursuant to state law and joint participation with state officials in such deprivation). No government entity funds FINRA nor plays any role in the selection of its board members or officers, and those individuals are in no way characterized as governmental officers. Cf. Brentwood, 531 U.S. at 298-302 (finding that the school athletic association was a state actor because, inter alia, state board members sat on the association‘s governing bodies and public-school officials participated in the state retirement system, such that public institutions and public school officials were sufficiently entwined in the association). FINRA is self-governing; it creates its own rules and standards, including the setting of salaries of its officers and penalty amounts unilaterally. Cf. Lebron, 513 U.S. at 394-99 (finding that Amtrak was a state actor because it had the same objectives as the government, was created by the government, and functioned under the government‘s control such that “the corporation is part of the Government“).
FINRA also aims to perform functions that are neither contemplated nor shared by the SEC, including, to name a few, administering broker qualifications examinations, see Turbeville, 874 F.3d at 1271, “conduct[ing] inspections of brokers and dealers,” and enforcing compliance with professional industry standards as well as FINRA‘s own rules and regulations, SAC ¶ 49. In FINRA‘s adjudicative capacity, this SRO alone determines which cases to investigate and when to file a complaint, and any decision that FINRA makes is not binding on the SEC in any subsequent review by this federal agency. In fact, any review by the SEC is de novo and the agency may consider evidence not previously considered by FINRA or the NAC. Cf. Peacock, 794 F.3d at 43 (holding that Xerox is a state actor when performing as
Second, plaintiff concedes that no court has yet to hold that FINRA is a state actor. See Hr‘g Tr. 24:15-23 (The Court: “I haven‘t found any case that‘s held that FINRA is a state actor or any case that‘s found either the New York Stock Exchange, which is another SRO, or NASD, the predecessor to FINRA, was a state actor. Are there any such cases?” Plaintiff‘s Counsel: “There is not, to my knowledge, such a case.“). Rather, a multitude of courts nationwide have held the contrary—that FINRA is a private entity wholly separate from the SEC or any other government agency.7
The D.C. Circuit is notably not among those courts to have opined on this question. Consequently, both parties attempt to read between the lines of existing Circuit precedent discussing FINRA and its predecessor NASD as controlling, if not persuasive, authority in considering this question. Compare Gov‘t‘s TRO Opp‘n at 1 (citing Saad v. SEC, 980 F.3d 103, 104 (D.C. Cir. 2020) (referring to FINRA as “a private self-regulatory organization“)) and id. at 16 (citing Free Enter. Fund v. Pub. Co. Acct. Oversight Bd., 561 U.S. 477, 484-86 (2010)
(contrasting defendant, a state actor, with “private self-regulatory organizations” in the securities space, such as FINRA)), and FINRA‘s TRO Opp‘n at 8 (citing Free Enterprise, 561 U.S. at 484-86), with Pl.‘s TRO Mot. at 9 (citing NASD v. SEC, 431 F.3d 803, 804-05, 807 (D.C. Cir. 2005) (referring to NASD as a “quasi-governmental agency” with “quasi-governmental authority to adjudicate actions against members” and “quasi-governmental power to discipline its members“)). That exercise, while not fruitless, is also neither particularly helpful nor binding—the D.C. Circuit has not provided clear direction and has most recently passed on the opportunity to do so. See Springsteen-Abbott v. SEC, 989 F.3d 4, 7 (D.C. Cir. 2021) (referring only to the “premise that FINRA is a state actor” as “contested“).
Third, policy considerations militate strongly against accepting Alpine‘s invitation
In vigorously urging that FINRA be deemed a state actor, plaintiffs make one thing crystal clear: plaintiffs are disgruntled members of FINRA. See, e.g., SAC ¶¶ 64-73 (criticizing the selection and operation of FINRA‘s board), 74-83 (disparaging FINRA‘s independence and supposed lack of industry representation on the board), 87 (accusing FINRA of taking retaliatory action against members of the microcap market such as plaintiffs), 100-110 (lodging complaints about FINRA‘s fee structure, budget, and board-approved executive salaries), 129 (asserting that the Enforcement Proceeding is FINRA‘s attempt
Since FINRA is unlikely to be a state actor, plaintiff‘s separation of powers, Appointment Clause, Fifth Amendment, and Seventh Amendment claims are also likely foreclosed.
2. FINRA Does Not Violate the Private Nondelegation Doctrine
Pleaded in the alternative, plaintiffs next argue that the Exchange Act “improperly and unconstitutionally delegates legislative power to an entity outside the Legislative Branch.” SAC ¶ 160. Alpine‘s motion for injunctive relief then focuses on FINRA‘s alleged violation of the private nondelegation doctrine, arguing that “Congress and the SEC have managed to delegate and outsource enforcement of federal securities law to a private entity that can ignore fundamental constitutional rights.” Pl.‘s TRO Mot. at 20. Defendants counter that no such violation is present because “FINRA functions subordinately” to the SEC, which maintains “authority and surveillance over FINRA‘s activities.” Gov‘t‘s Opp‘n at 8 (citation omitted); accord FINRA‘s TRO Opp‘n at 11-13. Defendants are again likely correct.
“Federal agencies may not subdelegate their ‘decision-making authority ... to outside entities—private or sovereign—absent affirmative evidence of authority to do so.‘” Louisiana Pub. Serv. Comm‘n v. FERC, 860 F.3d 691, 696 (D.C. Cir. 2017) (quoting U.S. Telecom Ass‘n v. FCC, 359 F.3d 554, 566 (D.C. Cir. 2004)). Aside from explicit statutory authority, an agency delegation to a private entity is valid if the agency exercises “authority and surveillance” over the private actor and “law-making remain[s] in the hands of the agency and [is] ‘not entrusted to the industry.‘” Ass‘n of Am. R.R. v. U.S. Dep‘t of Transp., 896 F.3d 539, 546 (D.C. Cir. 2018) (quoting Sunshine Anthracite Coal Co. v. Adkins, 310 U.S. 381, 399 (1940)).
Congress intended that SROs, like FINRA, would fulfill a supervisory role over the securities industry. See
Although FINRA may take the first step in investigating and disciplining an entity for violation of its rules, an SEC regulation, or a statutory provision, id.
3. Plaintiffs’ First Amendment Claim Lacks Merit
Finally, plaintiffs challenge broker-dealers’ “forced” association with FINRA “in order to engage in their chosen profession.” SAC ¶ 164. Defendants argue that the Exchange Act‘s requirement that registered broker-dealers join FINRA “does not alone implicate any First Amendment right” and that, because “[p]laintiffs do not assert any ‘expressive purpose[]’ for which they wish to avoid association with FINRA,” plaintiffs’ First Amendment claim must fail. Gov‘t‘s Opp‘n at 19; accord FINRA‘s TRO Opp‘n at 13-14. Again, defendants’ arguments have a substantial likelihood of prevailing.
Certainly, the First Amendment‘s protection of freedom of speech also extends to protect “the right to eschew association for expressive purposes.” Janus v. Am. Fed‘n of State, Cnty., and Mun. Emps., Council 31, 138 S. Ct. 2448, 2463 (2018); see Roberts v. U.S. Jaycees, 468 U.S. 609, 623 (1984) (“Freedom of association ... plainly presupposes a freedom not to associate.“). Freedom of expressive association, however, is not absolute. Boy Scouts of Am. v. Dale, 530 U.S. 640, 648 (2000). Rather, the Supreme Court has held that a regulation may override that right when it “serve[s] compelling state interests, unrelated to the suppression of ideas, that cannot be achieved through means significantly less restrictive of associational freedoms.” Id. (quoting Roberts, 468 U.S. at 623).10
FINRA articulates a significantly compelling interest embodied in the Exchange Act to justify mandatory FINRA membership. In permitting securities industry regulation through SROs, Congress intended those entities to “prevent fraudulent and manipulative acts and practices, [] promote just and equitable principles of trade, [] foster cooperation and coordination” among all industry players, “remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest.”
Mandatory FINRA membership functions accordingly to ensure that broker-dealers transacting in the securities space all adhere to the same set of professional and industry standards to protect both actual and prospective securities purchasers. See Gov‘t‘s Supp. Br. at 6 (citing Roth v. SEC, 22 F.3d 1108, 1109 (D.C. Cir. 1994)). For instance, FINRA sets “recordkeeping and reporting obligations, fiduciary duties, and special antifraud rules[,]” Gov‘t‘s Supp. Br. at 7 (quoting In re Registration Requirements for Foreign Broker-Dealers, Exchange Act Release No. 34-27017, 1989 WL 1097092, at *3-4 (July 11, 1989)), as well as conducts professional training to assure industry participants that those transacting in the space are “financially capable” of doing so in accordance with regulatory standards and in pursuit of fair and transparent treatment of customers. Gov‘t‘s Supp. Br. at 7 (citing SEC, Persons Deemed Not to Be Brokers, Exchange Act Release No. 22172, 1985 WL 634795, at *2 (June 27, 1985)). By joining FINRA, members agree to bind themselves to standards and be held accountable if their conduct falls short—all to the benefit of free-flowing and functioning financial markets and fair treatment towards customers. Since the compelling interest in statutorily mandated FINRA membership so outweighs any expressive association right, plaintiffs again are unlikely to succeed on their First Amendment claim.11
In sum, none of plaintiffs’ claims in their operative complaint are likely to succeed on the merits, resulting in this factor weighing against a preliminary injunction or a TRO.
B. Irreparable Harm
On the second factor, Alpine argues that resolution of the pending Enforcement
At the outset, Alpine bluntly states that FINRA‘s Enforcement Proceeding subjects it to potential expulsion from the industry, an existential threat to its business that would force the company to cease operations, and so the proceeding must be delayed. See Pl.‘s TRO Mot. at 22-23. Yet, Alpine faces precisely the same expulsion penalty under the March 2022 Panel Decision currently on review by the NAC. See generally March 2022 Panel Decision. Enjoining the NAC review process, however, is not the focus of the injunctive relief Alpine now seeks, despite the fact that expulsion may be inevitable if the March 2022 Panel Decision is upheld. That consequence does not arise from any lack of due process afforded to Alpine at the original enforcement proceeding leading to the March 2022 Panel Decision now on appeal to the NAC, nor from the ongoing Enforcement Proceeding, nor even from plaintiffs’ asserted constitutional claims. Rather, that consequence appears to be the result of Alpine‘s failure to comply with FINRA‘s permanent cease-and-desist order issued as part of the March 2022 Panel Decision. In the face of that decision, which took immediate effect on March 22, 2022, Alpine is suspected of flouting FINRA‘s directive to cease harmful conduct by failing to comply with FINRA‘s permanent cease-and-desist order. See FINRA‘s TRO Opp‘n, Ex. B, Pet. for a Hearing & the Imposition of Sanctions – Preliminary Statement (“Pet. for Enforcement Proceeding“) ¶¶ 1-2, ECF No. 70-2 (“FINRA‘s Department of Enforcement requests a hearing ... and the imposition of sanctions against Respondent Alpine ... for violating a March 22, 2022 Permanent Cease and Desist Order .... Alpine disregarded the terms of the [Order], which was intended to prevent the firm from harming customers through ongoing acts of misconduct.“). In allegedly defying the permanent cease-and-desist order—by FINRA‘s count, more than 35,000 times—FINRA decided that, due to Alpine‘s chronic recidivism, this SRO had little choice but to take expedited steps to expel the company from the industry even while Alpine‘s appeal of the March 2022 Panel Decision is pending, a decision, as noted, that also recommended expulsion. See Pet. for Enforcement Proceeding ¶¶ 5-6.
In context, Alpine now seeks to employ extraordinary equitable relief to halt FINRA‘s continuing enforcement of its own orders, under the cloak of several asserted constitutional claims so that this Court can save Alpine from harm allegedly due to its own defiance of those orders. Granting the requested TRO and consequently delaying the Enforcement Proceeding would thus sanction Alpine‘s alleged noncompliant conduct with FINRA‘s permanent cease-and-desist order. Such a ruling would encourage violators to race to district court with constitutional claims to delay or halt enforcement proceedings, providing a direct mechanism to subvert FINRA‘s enforcement of its own orders designed to
On that point, Alpine invokes Axon to argue that its assertion of constitutional claims against FINRA and its adjudicatory process subjects the company to a “here-and-now injury” and automatically triggers a finding of irreparable harm. See Pl.‘s TRO Mot. at 22-23 (quoting Axon, 143 S. Ct. at 903). Indeed, the Supreme Court expressed the view that being subjected to an adjudicatory process that a plaintiff claims is constitutionally flawed is “impossible to remedy once the proceeding is over” and a “grievance [for which] the court of appeals can do nothing: [a] proceeding that has already happened cannot be undone.” Axon, 143 S. Ct. at 903-04. Alpine is right that this strong language in Axon must be viewed as a consideration relevant to irreparable harm, see Hr‘g Tr. at 63:7-13 (Alpine agreeing that the “here-and-now injury” language in Axon is the Supreme Court “putting its thumb on the scale among the preliminary injunctive factors for irreparable harm“), and neither FINRA nor the government, as intervenor- defendant, present much argument against this view, see, e.g., Hr‘g Tr. at 78:13-80:11 (FINRA arguing only that Axon does not alter the preliminary injunction analysis); id. at 89:4-90:6 (referencing the government‘s choice not to take a position on certain preliminary injunction factors before stating that nothing in Axon displaces the preliminary injunction factors).
Consequently, under the Supreme Court‘s explicit language, the nature of the constitutional claims asserted here, no matter their unlikelihood of success, suffice to show irreparable harm to Alpine, even though any such harm may stem directly from Alpine‘s noncompliant actions.12
Finally, the parties contest where other interests lie. Alpine argues that, FINRA “waited years to assert [its] claims [against Alpine] and would suffer no prejudice” from a delay in the Enforcement Proceeding and that the public has an interest in “assuring that Alpine is not subject to unconstitutional treatment at the hands of FINRA.” Pl.‘s TRO Mot. at 23 (footnote omitted). Conversely, FINRA argues that “[a] preliminary injunction would impair FINRA‘s pursuit of its regulatory mandate and undermine the public interest by barring FINRA” from enforcing its orders, including those against Alpine. FINRA‘s TRO Opp‘n at 16. FINRA is correct.
FINRA has an interest in protecting the public from the harms caused by broker-dealers engaging in securities violations. This is the very mission of this SRO. That overwhelming interest is especially important in FINRA‘s case of conducting expedited enforcement actions to halt the imminent risk to the public presented by bad actors potentially resulting in millions of dollars lost from customers, like those that initiated FINRA‘s investigation against Alpine in 2019. See March 2022 Panel Decision at 2 (“Enforcement‘s investigation of Alpine Securities began when some of Alpine Securities’ customers complained to FINRA about, among other things, the firm‘s $5,000 monthly account fee.“). The risk of harm to the public from an alleged bad actor openly and repeatedly flouting a remedial cease-and-desist order issued by a FINRA panel, allegedly thousands of times, at the expense of customers, is significant and concrete compared to Alpine‘s interest in asserting constitutional claims against FINRA that have an unlikelihood of success for the reasons already summarized. As such, the balance of equities and public interest disfavor any injunctive relief.
***
In considering the four factors in total, while irreparable harm tips in Alpine‘s favor, the other factors strongly weigh against granting plaintiff‘s request for equitable relief and so such relief is inappropriate here.
IV. CONCLUSION
For the foregoing reasons, plaintiffs’ Motion for Reconsideration of Minute Order Denying Emergency Preliminary Injunction Motion is granted and plaintiffs’ Renewed Emergency Motion for Preliminary Injunction and Temporary Restraining Order is denied. An Order consistent with this Memorandum Opinion will be entered contemporaneously.
Date: June 7, 2023
BERYL A. HOWELL
District Judge